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I want to talk for a moment about where we are on this market train. First of all, the bullish percent indicators I use are almost all positive. The short-term indicators for the NYSE - the percent of stocks above their 10-week moving average, and High-Low Index - are both positive. Only the 10-week indicator is negative for the Nasdaq, while the Nasdaq High-Low remains positive.

The intermediate Optionable Bullish Percent indicator, which simply measures the percent of optionable stocks on point & figure buy signals, is positive.

And the long-term bullish percent indicators for the NYSE and NASDAQ both remain positive. The only negative is that the field position for these indicators is terrible, but that's been the case for nearly two months now.

Looking at some of the areas being hit the hardest today the best observation I can make is that the weakness, so far, is just a pullback. In other words, we are simply not seeing enough selling to create technical damage. You, in the back of the room, with your hand raised, you want to know what good these indicators are if the market is coming in by better than 4% in some areas? Good question.

The answer is that the field position of the indicators tells you what risk level you are dealing with, in this case very high, while on a secondary level the individual charts of the instruments you are trading tell you what the risk level is in a given instrument.

Let's look at the Biotech HOLDRs Trust (BBH), as an example, since it's down better than 4% today. Now a 4% haircut is nothing to sneeze at, or is it? The chart of the BBH shows that so far, at least, it's less a sneeze than a simple exhale. Going into today, with the BBH chart marked at 140, you would look at the point & figure chart and see immediately that it would take a move to 126 to give a sell signal. Incidentally, that would be the first sell signal for the BBH since February.

Knowing this, and knowing where the indicators are, you are now armed with several critical pieces of information that the vast majority of people on the other side of your trades do not have. Number one, you know that the offensive team has the ball so the short side is a bit like rowing upstream. Two, you know that the playbook is limited because market risk is so high. Number three, you know that the BBH has a long way to pull back before a sell signal is generated. Finally, you know that if that sell signal occurs, it would be the first sell signal since February.

Toddo often writes that if you are bearish on downticks, but bullish on upticks, then you need to step back and take a deep breath. Part of the relief in having a discipline is that, theoretically, it keeps you from bouncing around randomly with the color of the tape. As the walk through above hopefully shows, knowing where you are on the risk spectrum, and what it would take to alter it, goes a long way toward smoothing out your reactions to market conditions.

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